1. Why is it important for a commercial firm have a derivative position qualify as a hedge? Explain in detail.
2. You have a stock index portfolio with a beta of 1.0 and a market value of $10,000,000. If you sell $10,000,000 nominal value of S&P 500 futures contracts, what is the return of the combined stock and stock index futures contract? What have you done to the original $10,000,000 stock market position? Explain in detail.
3. The recent financial crisis has exposed a need to strengthen the risk management process in financial institutions. Part of these efforts is redesigning the risk management framework. What are the three lines of defense in effective risk management and how do we distinguish among their functions? How do they help manage the risk throughout the organization? Explain in detail.